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How the Brexit Outcome Impacts Institutional Investors

Michael Maduell, President of the Sovereign Wealth Fund Institute

Michael Maduell, President of the Sovereign Wealth Fund Institute

The United Kingdom’s choice to exit the European Union, combined with U.K. Prime Minister David Cameron resigning, and a plummeting pound sterling down at a 31-year low, sets the stage for potential opportunity for wealth funds and pension investors. JPMorgan Chase CEO Jamie Dimon sent a memo telling that foreign exchange volumes were at a record on Thursday night. The memo stated, “We remained totally open and accessible on e-trading channels overnight and processed 1,000 trading tickets per second at one point.”

This historic time in U.K. history, in which voters, at 72.2% turnout, tallying “Leave” totaled 17,410,742 versus “Remain” at 16,141,241, does put the concept of the European Union at risk. Cameron’s successor will be tasked to invoke Article 50 of the EU Treaty of Lisbon. Other political figures within the EU have called for an exit, such as in Italy and the Netherlands. Furthermore, pollsters, pundits, prediction markets and politicians greatly miscalculated the referendum vote of Britain exiting the EU. This makes the job of a chief investment officer even more challenging. Whose opinion really matters? Are pundits telegraphing what they want to happen versus what is really going to happen?

Long-Term Institutional Investors

Remember, large pensions and sovereign wealth funds are long-term institutional investors with perpetual-like time horizons. These pools of patient capital have billions upon billions invested throughout Europe. In a recent McKinsey report, “From big to great: The world’s leading institutional investors forge ahead,” a key finding included more asset owners hiring portfolio construction specialists. Asset owners that can develop house views, may have an edge as the concept of analyzing economic scenarios is paramount to the success of wealth fund returns. Sovereign investors such as GIC Private Limited have internal resources and have been looking at a Brexit scenario for over a year.

According to data from the Sovereign Wealth Fund Transaction Database, sovereign funds directly invested US$ 17.85 billion in 2014 and US$ 29.41 billion in 2015 into the United Kingdom. What I find fascinating is that several cash-rich pensions and wealth funds are maintaining a positive tone when it comes to allocating more capital to Britain, while voicing some concern about risk spreading throughout the eurozone. According to the Statistisches Bundesamt, Germany exported €89,288,118,000 worth of goods and services to the United Kingdom in 2015. On the other hand, the United Kingdom exported €38,324,475,000 worth of goods and services to Germany. Does Germany or the U.K. have economic leverage in this picture? Will the U.K. have weaker access to EU markets, or will the U.K. be able to compete with less regulations? Bottomline, Germany, France, and Spain for that matter want the U.K. to exit quickly to avoid further contagion and reduce economic uncertainty (a word that I dislike using). Thus, bond market specialists could see less-resilient economies in the EU experience bond spreads likely widening.

The Optimists

Many sovereign wealth funds have skin in London, choosing to operate their European headquarters in the city. Norway’s Government Pension Fund Global (GPFG), made it publicly-known they will remain a long-term institutional investor in the U.K. regardless of the Brexit outcome. Another large asset owner, the Canada Pension Plan Investment Board, one of the most active public institutional investors, mentioned positive prospects when it comes to investing on the U.K. referendum decision. A CPPIB spokesperson told Reuters on Friday that, “As any investor, we have a bias to stability over uncertainty, yet periods of dislocation can present compelling opportunities that short-term investors are unable to pursue.”

In the end, for some asset owners, they believe outsized returns are possible when excess fear and panic hit markets.

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.

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